PROJEC. Overview. and regulations. monitoring. not have. revenues. Administration s. provide. update. accurate for four of. would go received in

Transcription

1 PROJEC CT SUMMARY Overview The financial and management controls over the processes for administration of contracts at Texas A& &M University generally provide assurance that business and service Table of Contents contracts are properly executed in compliance with Project Summary... 1 applicable laws, policies, and regulations. Detailed Observations... 3 However, weaknesses were noted related to the Basis of Review post-execution monitoring of revenue contracts. Audit Team Information Some University departments that were reviewed Distribution List do not have processess in place to provide assurance that contract revenues received are accurate and complete. As a result, there is a risk thatt errors and inaccuracies in revenues received would go undetected. Our analysis involved approximately $95 million in businesss and service contract revenues generated during fiscal year Additionally, the Department of Contract Administration s database needs to have some data fields addedd in order to provide information to better gauge the effectiveness and efficiency of the contracting process. The University also needs to update its contractt administration rule to require the Department of Contract Administration to review large dollar hotel contracts and complex conference arrangements. Summary of Significant Results Verification of Contract Revenuee University departments do not have processes in place to provide assurance that revenues received are complete and accurate for four of eight contracts reviewed. As a result, theree is risk that errors and inaccuracies in revenues received would go undetected. In fiscal year 2007, $10.6 million was received in revenue on these four contracts. Additionally, for three of the four contracts there was a lack of clearly defined responsibility to monitor the revenues received and for one contract, the University did not request financial summary reports to review. The Texas A&M University System Internal Audit Department Second Quarter, Fiscal Year 2008 Page 1

2 Summary of Management s Response Scope Management concurs with the observations and recommendations in the audit report. Measures necessary to address the recommendations are in process. Follow up procedures will be performed by the University to ensure corrective actions are implemented as intended. A follow-up plan will be developed that is specific to each audit recommendation. The review focused on contracting controls in place at the Department of Contract Administration and other departments across the University. Testing included analysis of revenue and expenditure data to identify potential contractual situations and detailed reviews of selected business and service revenue contracts. Contracting controls and expenditure and revenue transactions were reviewed for the period September 1, 2006 through August 31, Fieldwork was conducted September 2007 through December Page 2 Second Quarter, Fiscal Year 2008

3 OBSERVATIONS, RECOMMENDATIONS, AND RESPONSES 1. Verification of Contract Revenue Observation Processes are not in place to verify that revenues received are complete and accurate. University departments do not have processes in place to provide assurance that revenues received are complete and accurate for four of eight contracts reviewed. As a result, there is risk that errors and inaccuracies in revenues received would go undetected. In fiscal year 2007, $10.6 million was received in revenue on these four contracts. These contracts generated revenue for the University from a wide range of areas including licensed apparel sales, on-campus bookstore, beverage sales, and athletic venue advertising sales. Our testing identified the following: University-licensed Merchandise: The Licensing Resource Group (LRG) manages licensing contracts for the University with approximately 500 companies that produce University trademarked apparel and merchandise for retail sales. Once a quarter, LRG sends a Royalty Summary Report to the University s Collegiate Licensing Office and electronically transfers the University s share of the royalties collected from licensees. No process is in place to use the summary report or other means to verify the University s share of the royalties paid by LRG. The contract with LRG has a right-to-audit clause, but it has not been exercised. Bookstore Sales and Beverage Commissions: Barnes & Noble and Coca Cola contract revenue and commission reports are received through the Department of Contract Administration. Based on the commissions generated, Financial Management Operations allocates the revenue to various fund groups and the Office of Budgeting and Analytical Services prepares the fund balances report for the President s Office. However, no one is charged with monitoring and verifying the revenue received is accurate and complete in accordance to the terms of the contracts. Athletic Multi-media Sales and Marketing: Learfield Communications has a multi-media rights agreement with the University for exclusive sales and marketing of athletic programs and related activities. In the first year of the contract, the Second Quarter, Fiscal Year 2008 Page 3

4 1. Verification of Contract Revenue (cont.) Athletics Department is monitoring guaranteed contractual amounts paid by Learfield. However, financial reports were not being requested from Learfield to verify accurate and complete payments according to the supplemental compensation plan and revenue sharing terms of the multi-media rights agreement. The lack of a post-execution monitoring process for revenue contracts increase the risk that inaccurate or incomplete revenues are received by the University. Recommendation The University should: Require departments to have monitoring processes in place to provide assurance that contract revenues received are accurate and complete. This may involve a range of activities depending on the nature and significance of the contract such as review and reconciliation of sales figures to ensure the University is receiving the correct contracted amounts. The Department of Contract Administration should work with departments to determine appropriate measures to monitor and verify revenues in accordance with specific contract terms. Require assurance that controls are in place to protect University interests or exercise contract specific right-to-audit clauses in those situations when an external party assumes the responsibility for contracting and collecting revenues on behalf of the University, like the LRG contract. Strengthen monitoring controls by defining areas of responsibility between Contract Administration, Financial Management Operations and the Office of Budgeting and Analytical Services including the verification of revenues and communicating to all administrative parties to ensure they understand their specific duties and responsibilities with regard to university-wide contracts like the Barnes & Noble and Coca Cola contracts. Request financial reports as necessary to verify that payments are complete and accurate in accordance with the supplemental compensation plan and revenue sharing, and other financial terms of the Learfield contract. Reconcile reported information to actual receipts and contract terms. Page 4 Second Quarter, Fiscal Year 2008

5 Management s Response 1. Verification of Contract Revenue (cont.) Upon full execution of a contract, Contract Administration will: 1) provide a contract execution summary to the respective TAMU department and Financial Management Operations (FMO) and 2) provide a reminder to departments of their roles and responsibilities to ensure contract revenues are accurate and complete. The contract execution summary will include the respective TAMU department, contractor name, pertinent revenue dates or frequency of payment occurrences, revenue amounts stated in the contract, and term of agreement. On a quarterly basis, Contract Administration will provide a revenue contract schedule to TAMU departments and FMO noting active revenue contracts and pending revenue payments for that quarter. This will serve as an additional reminder to the departments to monitor revenues. FMO will utilize these summaries to verify with departments that revenues have been reviewed for receipt and accuracy and accounted for properly. In those instances where a third party is collecting revenue on behalf of TAMU, as in the LRG contract, Contract Administration will provide notification of any right to audit clause in the contract execution summary to the respective TAMU department. TAMU departments are expected to evaluate, on a case by case basis, the necessity of exercising their right to audit and will be reminded of that responsibility by Contract Administration concurrent with contract execution. These processes will be dependent on additional fields in an updated Contract Administration database. It is anticipated that the database will be operational by August 31, 2008 for use with all contracts executed after this date. Revenue and date information for active revenue contracts executed prior to this date will be entered into the revised database no later than November 30, The TAMU Office of Budgets and Analytical Services will assume responsibility for reconciliation of university-wide agreements such as Barnes & Noble and Coca Cola. The process will be in place by August 31, As provided for in the contract between the Athletic Department and Learfield Communications, the Athletic Department will request a financial report at the end of each fiscal year from Learfield to verify the accuracy and completeness of the payments made according to the supplemental compensation plan and revenue sharing terms of the contract. This report will be reconciled to the actual payments Second Quarter, Fiscal Year 2008 Page 5

6 1. Verification of Contract Revenue (cont.) received from Learfield. The process will occur by November 30, Contract Administration Department Database Observation The contract administration database does not provide information to track the efficiency and effectiveness of the contracting processes. The contract administration database maintained by the Department of Contract Administration has been a strength in the control environment for overseeing the University s delegation of authority. However, the database has been in existence for approximately ten years and needs revision to provide additional management information to gauge the effectiveness and efficiency of contracting processes for the University. Additional data fields are needed to provide information such as contract processing status, contract type (revenue or expenditure), use of standardized contracts, and Financial Accounting Management Information System (FAMIS) account numbers which could provide useful information for monitoring contracts. The lack of contract information limits specialized reporting, locating contract financial information and identifying usage of standard contracts. The inability of departments to see the status of contracts via the Internet creates inefficiency for the Department of Contract Administration due to the time spent taking phone calls and answering s concerning contract status. Recommendation To better track the effectiveness and efficiency of the contracting process, enhance the University s contract database by adding additional fields including (but not limited to) contract status, revenue or expenditure identification, standard versus nonstandard contracts and information such as account number linking the contract to FAMIS. Management s Response The Finance Division Computing Group, working in conjunction with Contract Administration staff, is currently transitioning the database to a web-based system, altering the input fields in order to generate better contract reporting, such as separation of revenue and expense contracts, improving tracking features and other enhancements. Current progress is indicative of a fully operational database for use by August 31, 2008 for all contracts executed after this date. Pertinent information for active revenue contracts will be entered no later than November 30, Page 6 Second Quarter, Fiscal Year 2008

7 3. Hotel Contract Review Observation Conference hotel contracts do not undergo administrative review. University Rule , Contract Administration, which addresses hotel contracting, does not require the Contract Administration Department to review hotel contracts. Increasingly large dollar contracts for hotel accommodations and conferences (in excess of $100,000) are being initiated by University departments. There is an increasing risk that departments may unknowingly obligate the University to expenses and liabilities associated with these contracts due to standard penalty clauses within these type of contracts which need to negotiated and modified so that the University can minimize its loss when a conference event is canceled. Recommendation Update the University s Contract Administration rule for delegation of authority to require Contract Administration Department review of hotel contracts and complex conference arrangements over a certain dollar threshold as determined appropriate by management. Management s Response Contract Administration will work with the Office of General Counsel to develop a standard addendum for use by TAMU departments regardless of the dollar value of the hotel/conference contract. The standard addendum will be posted to the Contract Administration website. This standard addendum will be submitted for Office of General Counsel s review and approval by August 31, Additionally, Contract Administration will revise University Rule M1-Contract Administration to reflect that TAMU departments are required to use the standard addendum and maintain copies of fully executed addendum and hotel/conference facility contracts. A department desiring to execute a non-standard hotel/conference contract must obtain authorization and approval from Contract Administration. Contract Administration will accordingly revise University Rule M2, President s Delegation of Authority for Contract Administration, to provide for the changes noted above. Revisions to these rules will be submitted to the University for the review and approval process by August 31, Second Quarter, Fiscal Year 2008 Page 7

8 4. Basketball Team Travel Observation Basketball team travel was not properly contracted. The Athletic Department paid $411,000 without a valid contract for charter airline services for the A&M basketball team during fiscal year The payments were made based on a sponsorship agreement between the air charter company and the Athletic Department s multimedia marketing company. The agreement stipulated Texas A&M would make such payments from its basketball budget. This contract was signed by the onsite manager for the contractor with no signoff by A&M Athletic Department administration. As a consequence, this was in violation of University purchasing rules, delegation of authority limits, and System regulation for use of charter airplanes. Recommendation Require the review and approval of all third party contracts by Athletic Department administration. Contracts obligating the University should be approved according to the University s Delegation of Authority. Management s Response The Athletic Department informed Learfield Communications that all contracts obligating the University must be reviewed and approved by the Athletic Department administration. These contracts are routed by the Athletic Department according to the University s Delegation of Authority. 5. Year-end Recognition of Contract Revenues Observation Fiscal year-end accruals are not being made to properly recognize contract revenues. Fiscal year-end accruals are not being made for collegiate licensing and beverage revenues. The Financial Management Office (FMO) receives quarterly revenue information on a calendar year basis from LRG, but no fiscal year 2007 year-end accounting entry was made to properly recognize revenue earned in July and August The LRG contract generated approximately $1.8 million in revenue during fiscal year The error resulted in approximately $75,000 in underreported revenue on the fiscal year 2007 annual financial report. Page 8 Second Quarter, Fiscal Year 2008

9 5. Year-End Recognition of Contract Revenues (cont.) In addition, $6,800 in monthly Coca Cola commission revenue for August 2007, received in September 2007 by the Contract Administration Department, was not accrued for fiscal year The lack of a proper accrual results in revenues being recognized in the fiscal year when it was collected instead of when it was earned. Recommendation Make fiscal year-end accruals to properly recognize contract revenues for the LRG and Coca Cola contracts. Coordinate this with FMO to produce more accurate and reliable revenue receivables for these contracts. Management s Response Financial Management Operations Accounting Processing Group will begin recording year-end revenue accruals for both the LRG and Coca Cola contracts for the period ending August 31, These accruals will be recorded as part of the fiscal year end close-out process and will be complete by November 30, Second Quarter, Fiscal Year 2008 Page 9

10 BASIS OF REVIEW Objective Criteria To review the financial and management controls over the processes for the administration of University contracts to determine if resources are used efficiently and effectively and in compliance with applicable laws, policies and regulations. Our review was based upon standards as set forth in the System Policy and Regulation Manual of The Texas A&M University System; the Treadway Commission s Committee of Sponsoring Organization s Internal Control - Integrated Framework (COSO); and other sound administrative practices. The evaluation was performed in compliance with generally accepted government auditing standards and other criteria to conform with the Institute of Internal Auditors International Standards for the Professional Practice of Internal Auditing. Background The University s delegation of authority for contract administration, Rule M2, establishes the routing, level of review, and authorization to execute contracts in a broad range of twenty-two business areas. The Department of Contract Administration has oversight responsibility of the delegation of authority so that it facilitates a well-defined administrative control environment that assures management exercises its fiduciary responsibilities when executing and administering contracts on behalf of Texas A&M University. In carrying out these responsibilities, the Contract Administration Department reviewed approximately 1450 business and services contracts valued at approximately $93 million during fiscal year Page 10 Second Quarter, Fiscal Year 2008

11 AUDIT TEAM INFORMATION Auditors Assigned to the Review William Williams, CPA, Project Manager Katina Greenlee, CPA Mark Heslip, CPA Contact Information For questions regarding this review, contact Charlie Hrncir, Director. Phone: (979) Fax: (979) Web Site: The Texas A&M University System System Internal Audit Department 1200 TAMU College Station, TX Technology Way, Suite 2192 College Station, TX DISTRIBUTION LIST Dr. Elsa Murano, President Dr. Jerry R. Strawser, Interim Executive Vice President and Provost Dr. H. Russell Cross, Executive Vice President for Operations Mr. Terry Pankratz, Interim Senior Vice President and Chief Financial Officer Mr. Donald B. Edwards, Executive Associate Vice President for Finance Mr. Robert Bisor, Associate Vice President and Chief of Staff, Finance Division Mr. Joe Powell, Senior Associate Athletic Director and Athletics Chief Financial Officer Mr. Dean Endler, Executive Director, Department of Contract Administration Mr. Charley Clark, Associate Vice President for University Risk and Compliance Second Quarter, Fiscal Year 2008 Page 11